How to solve the revenue challenge: End fuel subsidy

A fortnight ago, the Statistician General of the Federation, Yemi Kale, came out to say the agency couldn’t complete work on the unemployment figures this year because of funding challenge as only about 25 percent of the agency’s budget has been released to it. While some were quick to read political motives into the non-release of money to the agency, those familiar with the state of the nation’s finances know that it has more to do with revenue challenge. Even as Kale noted, most agencies of government have only received 10 percent of their capital allocation so far this way. Truth is, for many years now, successive governments could not finance the capital expenditure component of the budget, which is usually between 20 and 30 percent of the budget and had to resort to borrowing.

This year isn’t any different. Recently, Nigeria was forced to raise a new $2.86 billion Eurobond at very high interest rates to fund its N9.1 trillion ($29 billion) budget which has a deficit of N2.4 trillion and could widen if ambitious revenue targets are not met.

But why is it difficult for the government to meet its revenue projections even as oil prices continue to rebound throughout 2018 – up to £72 per barrel at a time? The simple answer is subsidy on petrol. Nigeria currently spends N3.76 billion daily and N1.4 trillion ($3.9 billion) on importing petrol. How do we rationalise spending $3.9 billion on a crippling subsidy on fuel when 100 percent of its capital expenditure is borrowed? How can we rationalise such expenditure in an economy declared the poverty capital of the world where over 87 million people live in extreme poverty and 8000 people slide into extreme poverty every day. How can we justify this in a country where the health, education and social infrastructure are almost broken and with little or no investments in these sectors?  How can we justify this in a country with record high unemployment rate, high dependency rate, security challenges and the absence of right economic policies and programmes that will be a catalyst to lifting people out of poverty?

But the government should be concerned about its debts that keep piling up. As at the end of December 2017, the country’s total debt stock stood at N22 trillion, which is the equivalent of US$71 billion, data from the Budget Office show. The debt stock went up by US$4.4 billion or N1.4 trillion in 2017. A breakdown of the debt shows that US$18.9 billion is owed to external lenders while the balance of N15.9 trillion is owed to domestic creditors. Already, the federal government has exceeded its own target of ensuring that the country’s total debts do not exceed 19.39 percent of economic output or GDP in any year. When the government closed its books in 2017, country’s total debt stood at 20.12 percent of GDP.

However, what would have given the government more concern is the rising debt service burden which is beginning to eat up two thirds of government revenues. Debt service consumed a total of N1.8 trillion in 2017. This represents 75 percent of the government actual revenues in 2017. The government is spending an average of eighty kobo of every one naira it earns servicing the debts it is accumulating. The amount spent on debt service is higher than the N1.6 trillion released for capital expenditure in 2017, of which N1.4 trillion was the amount actually utilized. The country is now spending more money servicing debts than putting in place the infrastructure that will help grow the economy to repay those debts. The government is even seeing a fresh $6 billion from the China Exim Bank for the construction of the Ibadan-Kano rail line.

This is enough to set off alarm bells, but there seem to be a conspiracy of silence. Yet the government has continued to borrow. This is never a sustainable way to run a country or manage an economy. The best that could happen to the country is a return of the pre-2015 crushing debt burden.

This electioneering period will provide Nigerians an opportunity to demand from those who wish to govern the country to explain in clear details their economic management plans and how they will handle the revenue challenge and the crushing subsidy on petrol. Nigerians must not miss that opportunity or allow sentiments take over.